One person LLC w/1 Employee - Solo 401k?

[jsmith1985]

Can a one person LLC create a solo 401k plan if the LLC has one part-time employee working less than 1000 hours/year and who is not the owner and not related to owner? If so, what is the process and what things one should look out for?

[ETA Consulting LLC]

Sure. You would want age/service requirements of 21 & 1 Year (which should exclude the common law employee who is working less than 1000 hours). When you do this, however, you must ensure that the owner actually worked at least 1000 hours during any previous period to meet the eligibility requirement you established.

Pretty straight forward.

Good Luck!

[jsmith1985]

Sure. You would want age/service requirements of 21 & 1 Year (which should exclude the common law employee who is working less than 1000 hours). When you do this, however, you must ensure that the owner actually worked at least 1000 hours during any previous period to meet the eligibility requirement you established.

Pretty straight forward.

Good Luck!

But that is only for first year. What happens to second year when part-time employee is in Year 2?

[ETA Consulting LLC]

If the employee never works 1000 hours during the applicable 12 month computation period, then he'll never get a year of service; and will, therefore, never meet eligibility for the plan.

Good Luck!

[jsmith1985]

If the employee never works 1000 hours during the applicable 12 month computation period, then he'll never get a year of service; and will, therefore, never meet eligibility for the plan.

Good Luck!

Got it. Thanks,

[jsmith1985]

If the employee never works 1000 hours during the applicable 12 month computation period, then he'll never get a year of service; and will, therefore, never meet eligibility for the plan.

Good Luck!

Got it. Thanks,

In that case, even a Sole proprietor can have a part-time employee working less than 1000 hours a year that does not impact a Solo 401k plan. Then I do not understand why Vanguard/Fidelity mention that small business cannot have any employees.

[mbozek]

Reason some prototype plan sponsors do not allow anyone but employee and spouse to participate is that they do not want to be responsible if any other person including a child becomes a participant because the plan is now subject to ERISA. Premise of solo 401k is that it is exempt from ERISA.

Need to read plan document/adoption agreement to see who is eligible for employment.

[Calavera]

Be sure that a part-time employee have never worked more than 1000 hours per year since original date of hire.

[John Feldt ERPA CPC QPA]

Could even consider having a 2-year of service requirement with 1,000 hours per each year, if that helps. You'll have to have immediate vesting then of course.

[movedon]

Re the vendors' assertions that the business "can't have any employees", one possible reason is that they don't know what they're talking about. Many vendors put these solo 401(k)s in a completely separate department from their normal qualified plans department, and the people therein simply don't know anything about pensions. I have had the same argument with both vendors you mention trying to get them to transfer funds in a takeover situation without processing 1099-Rs, for example.

[jsmith1985]

Vanguard's Adoption Agreement form states in Section - two - Eligibility

"There will be no age and service requirements under this Plan"

Fidelity on the other hand does allow for age and service requirement but nowhere do they mention 1000 hours/year.

[ETA Consulting LLC]

Could even consider having a 2-year of service requirement with 1,000 hours per each year, if that helps. You'll have to have immediate vesting then of course.

That two year provision will not work for the 401(k) Source. It only pertains to the Match and/or Profit Sharing (e.g. non-deferral) sources.

[mbozek]

If the owner wants to hire a non spouse employee why not just adopt a generic 401k plan for a sole proprietor/ corp and adopt a provision that allows exclusions for age, hours of service or less than 2 years of service?

[John Feldt ERPA CPC QPA]

That two year provision will not work for the 401(k) Source. It only pertains to the Match and/or Profit Sharing (e.g. non-deferral) sources.

Of course, thanks. The 2-year idea was on my brain at the time of the post as we were proposing a 2-plan combo: profit sharing, not 401(k), with DB - both with a 2-year entry requirement.

[jsmith1985]

did talk to a couple of custodians and The view is that if one selects - Eligibility Service Requirement and selects 1 year, then employee has to work over 1000 hours to become eligible. It seems that this is the manner the plan documents are set up with IRS. So another custodian could have it set up the plan completely different.

There are some other issues like break in service that one needs to be aware of. However, if plan allows, then selecting one year of service will most likely disallow anyone who works less than 1000 hours to participate in the plan.

Another point was that one cannot distinguish between full-time and part-time employees. The only criteria is number of hours and length of "eligible" service.

This is at least what I understood. Hope this information helps. Please do your due diligence before blindly accepting the above as accurate. Trust but verify should be the motto here considering the amount of conflicting information there is.

If you find something incorrect then please let everyone know. We are all learning from each other and we are not experts in this field.

Thanks to everyone who provided assistance.

[K2retire]

Re the vendors' assertions that the business "can't have any employees", one possible reason is that they don't know what they're talking about. Many vendors put these solo 401(k)s in a completely separate department from their normal qualified plans department, and the people therein simply don't know anything about pensions. I have had the same argument with both vendors you mention trying to get them to transfer funds in a takeover situation without processing 1099-Rs, for example.

Sometimes the vendor knows the rules, but assumes that the potential client won't understand the nuances. In that case they are just over simplifying -- you can have employees, just not ELIGIBLE employees.

[jsmith1985]

Re the vendors' assertions that the business "can't have any employees", one possible reason is that they don't know what they're talking about. Many vendors put these solo 401(k)s in a completely separate department from their normal qualified plans department, and the people therein simply don't know anything about pensions. I have had the same argument with both vendors you mention trying to get them to transfer funds in a takeover situation without processing 1099-Rs, for example.

Sometimes the vendor knows the rules, but assumes that the potential client won't understand the nuances. In that case they are just over simplifying -- you can have employees, just not ELIGIBLE employees.

Vanguard was emphatic - No employees allowed. Period. Since plan does not have any provision to have age/period of employment etc restrictions.

[ETA Consulting LLC]

That would appear to be Vanguard's way of ensuring the Solo (k) doesn't fail to qualify. Keep in mind that setting up a plan has two mutually exclusive processes: 1) Ensuring the plan's document is drafted with the requirement on how it will operate. This may be with 21 & 1 that excludes common law employees as mentioned above. 2) Setting up the trust account to hold the money. This is what Vanguard, Fidelity, and any other fund company does.

So, when you ask about setting up a plan, we're likely going to tell you everything possible under step 1 above. You'll like find that those entities operating under step two do no possess the detailed knowledge, but rather operate in a system designed to capture the funds with as little complexity as possible; not that there's anything wrong with that.

With that said, you can easily set up a solo (k) plan using all the guidance that we provided in the previous posts. When you do this, ANYTHING that Vanguard or Fidelity or any other custodial company says becomes irrelevant, because all you will depend on them for is a place to park the trust funds.

Good Luck!

[jsmith1985]

That would appear to be Vanguard's way of ensuring the Solo (k) doesn't fail to qualify. Keep in mind that setting up a plan has two mutually exclusive processes: 1) Ensuring the plan's document is drafted with the requirement on how it will operate. This may be with 21 & 1 that excludes common law employees as mentioned above. 2) Setting up the trust account to hold the money. This is what Vanguard, Fidelity, and any other fund company does.

So, when you ask about setting up a plan, we're likely going to tell you everything possible under step 1 above. You'll like find that those entities operating under step two do no possess the detailed knowledge, but rather operate in a system designed to capture the funds with as little complexity as possible; not that there's anything wrong with that.

With that said, you can easily set up a solo (k) plan using all the guidance that we provided in the previous posts. When you do this, ANYTHING that Vanguard or Fidelity or any other custodial company says becomes irrelevant, because all you will depend on them for is a place to park the trust funds.

Good Luck!

Thanks,

That does mean that using Vanguard's plan to open an Individual 401k (the easiest way possible to do this) is out of bound as Vanguard will not allow employees. So only option, if one really has to use Vanguard, is to create one's own plan. But then using Vanguard as custodian etc leads to more complexities.

Better to find a custodian - like Fidelity - that already has the plan set up to allow for exemptions for employees that do not meet the 1000 hour in a year criteria.

[Bird]

That does mean that using Vanguard's plan to open an Individual 401k (the easiest way possible to do this) is out of bound as Vanguard will not allow employees. So only option, if one really has to use Vanguard, is to create one's own plan. But then using Vanguard as custodian etc leads to more complexities.

Not to drag this on endlessly, but that calls for another warning - unless you are very careful, if you set up your own plan and then want to put the investments with Vanguard, they are likely to set up a whole new "plan" instead of just opening an account to hold the money in the plan. You have to pretty much assume that they will try to screw things up and be on your guard the whole time.

[K2retire]

That does mean that using Vanguard's plan to open an Individual 401k (the easiest way possible to do this) is out of bound as Vanguard will not allow employees. So only option, if one really has to use Vanguard, is to create one's own plan. But then using Vanguard as custodian etc leads to more complexities.

Not to drag this on endlessly, but that calls for another warning - unless you are very careful, if you set up your own plan and then want to put the investments with Vanguard, they are likely to set up a whole new "plan" instead of just opening an account to hold the money in the plan. You have to pretty much assume that they will try to screw things up and be on your guard the whole time.

And that same caution applies to pretty much all recordkeepers, not just Vanguard.

[erisa parrot]

I thought one could not have a solo(k) with employees, even if the employees aren't eligible. It's possible the IRS is using the incorrect word, but from the One-Participant 401(k) page:

The one-participant 401(k) plan isn't a new type of 401(k) plan. It's a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan.

The link: http://www.irs.gov/Retirement-Plans/One-Participant-401%28k%29-Plans

[K2retire]

Expanding on the final sentence of erisa parrot's quote, these plans have the same rules as any other 401(k) plan. So really, the only question is whether they meet the criteria for a particular record keepers solo K pricing, and whether they have to file a 5500. The 5500 question is easy -- no other participants, no form required.

[jsmith1985]

I thought one could not have a solo(k) with employees, even if the employees aren't eligible. It's possible the IRS is using the incorrect word, but from the One-Participant 401(k) page:

The one-participant 401(k) plan isn't a new type of 401(k) plan. It's a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan.

The link: http://www.irs.gov/Retirement-Plans/One-Participant-401%28k%29-Plans

From the above link,

"Testing in a one-participant 401(k) plan

A business owner with no common-law employees doesn't need to perform nondiscrimination testing for the plan, since there are no employees who could have received disparate benefits.

The no-testing advantage vanishes if the employer hires employees. No matter what the 401(k) plan is called by a plan provider, it must meet the rules of the Internal Revenue Code. If you hire employees and they meet the plan eligibility requirements, you must include them in the plan and their elective deferrals will be subject to nondiscrimination testing (unless the 401(k) plan is a safe harbor plan or other plan exempt from testing). "

do not know if this is what allows one -participant plans to have non-eligible common-law employees.

[jsmith1985]

That does mean that using Vanguard's plan to open an Individual 401k (the easiest way possible to do this) is out of bound as Vanguard will not allow employees. So only option, if one really has to use Vanguard, is to create one's own plan. But then using Vanguard as custodian etc leads to more complexities.

Not to drag this on endlessly, but that calls for another warning - unless you are very careful, if you set up your own plan and then want to put the investments with Vanguard, they are likely to set up a whole new "plan" instead of just opening an account to hold the money in the plan. You have to pretty much assume that they will try to screw things up and be on your guard the whole time.

If one sets up one's own plan then I hope they use someone in this field to do that to ensure the above issue is mitigated. But good point, since it seems that Vanguard/Fidelity have cookie-cutter solutions which cannot be customized.